Ch05HullFundamentals7thEd - Fundamentals of Futures and...

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Unformatted text preview: Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 Determination of Forward and Futures Prices Chapter 5 1 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 Consumption vs Investment Assets Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold, silver) Consumption assets are assets held primarily for consumption (Examples: copper, oil) 2 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 Short Selling (Page 104-105) Short selling involves selling securities you do not own Your broker borrows the securities from another client and sells them in the market in the usual way 3 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 Short Selling (continued) At some stage you must buy the securities back so they can be replaced in the account of the client You must pay dividends and other benefits the owner of the securities receives 4 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 Notation S : Spot price today F : Futures or forward price today T : Time until delivery date r : Risk-free interest rate for maturity T 5 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 1. Gold: An Arbitrage Opportunity? Suppose that: The spot price of gold is US$1000 The quoted 1-year futures price of gold is US$1100 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity? 6 Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010 2. Gold: Another Arbitrage Opportunity? Suppose that: The spot price of gold is US$1000 The quoted 1-year futures price of gold is US$990 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity?...
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Ch05HullFundamentals7thEd - Fundamentals of Futures and...

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